Gibraltar:
Compson and Weal Litigation Saga Continues

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I have already written extensively about the case of
Compson v FSC & Weal V FSC involving an appeal
against certain decisions of the Gibraltar Financial Services
Commission ("FSC") , unreported, 29th April 2015, and
therefore for the purposes of this briefing note, I will assume
that the background is known to readers.

Suffice it to say that related litigation continues, with a
number of judgments recently handed down by the Supreme Court of
Gibraltar and an appeal to the Court of Appeal. These arose out of
an ex parte application for a freezing injunction by the
Administrator of Advalorem Value Asset Fund Limited against certain
named defendants (including Mr and Mrs Compson). The claimant's
Administrator made allegations of fraud whereby monies from United
Kingdom pension schemes were allegedly used to purchase land in
Scotland at a grossly excessive price. The allegations are set out
in the Judgement handed down by Mr Justice Jack on 4th September
2015.

The Judge noted that when he set out the facts in his Judgment,
he was making no determination of the facts, as that would only
happen after trial (or possibly a summary judgment application) and
that since the claimant made the application ex parte, he had not
heard from the defendants and had an open mind as to what their
case might be and as to the evidence in general. The Court's
sole task in the injunction application was to determine whether
the requirements for a freezing order (and in relation to one of
the defendants for service out of the jurisdiction) were
established. The application for a freezing order was refused
against one defendant (Mr Weal), but granted against the other
defendants (it is important to stress that there were other named
defendants in this case, not just Compson and Weal). The
application to serve AAML outside the jurisdiction was also
granted. I do not propose to review the Judgment in detail
(particularly as it arose from an ex parte application). There is,
however, one dicta (the Judge did not decide the point) which I
consider to be potentially important in the context of the
Gibraltar finance sector, and which I will come to later.

Of course, the fact that an interim injunction is obtained is no
reflection on the merits of any case or the liability of any
defendant. That can only be a matter for trial. A
freezing injunction is only meant to safeguard the position of a
claimant should he be able to later prove his allegations. It
should also be noted that at the ex-parte application stage when
none of the defendants were present or represented, Mr Justice Jack
held that the claimant had failed to show a good arguable case
against Mr Weal in fraud or in negligence or breach of statutory
duty. Accordingly, he refused to grant an injunction against
Mr Weal.

Interestingly, following the ex parte application three further
judgments were handed down in short succession. The first was a
Judgment dated 18th September 2015. It transpired, as far as one of
the named defendants against whom the freezing order was granted,
that the wrong man living in Gibraltar had been identified and
served. In fact, the person that should have been the intended
defendant in these proceedings is not a Gibraltar resident. The
claimant acknowledged the error, the banks and other financial
institutions were informed and moved quickly to try and rectify
matters. They therefore brought the matter back to Court where the
claimant unconditionally apologised for the error and the freezing
order was amended to remove the wrong man. Payment of damages was
also agreed between the parties.

A few days later (23rd September 2015) another Judgment was
handed down by Mr Justice Jack, following the return date on the
freezing order and submission of arguments by counsel on behalf of
Mr and Mrs Compson and AAML. Other defendants did not appear and
were not represented. Following consideration of full submissions
on behalf of Mr and Mrs Compson and AAML, the Judge refused to
extend the freezing order against these parties. The Judge heard
arguments on the existence of D&O Insurance and found it very
significant in considering whether to continue the freezing order
or not that the Compsons appeared to have insurance to defend
themselves against the current litigation (something that was
subsequently put in issue by the Administrator following the
handing down of the written Judgment itself). Per the Judge
"Insurers are notoriously unsentimental",
although it is of note that this was held by the Court of Appeal to
be an uncertain basis for the Judge's decision. The Judge
further held in determining for the purposes of the continuation of
the freezing order, that he considered the Compsons had shown a
sufficient basis for there to be a potentially viable third party
claim by them against a certain firm of overseas solicitors for an
indemnity or contribution (again, subsequently put in issue by the
Administrator). Thirdly, the Judge considered it a
"striking fact that no criminal investigation has been
begun against Mr and Mrs Compson, despite them expressly raising
this as an issue with the FSC" (apparently as long before
as March 2013). On this point the Court of Appeal held that it was
not clear what significance the Judge attached to the point.

The final Supreme Court judgement was handed down on the 24th
September 2015. This followed the handing down of the Judgment of
23rd September 2015, following which counsel for the Administrator
made an oral application to the Judge for him to revise
substantially the Judgment he had just handed down. He sought a
continuation of the freezing order against AAML and the Compsons.
The first point made was that there was a misunderstanding of the
true position as to whether the D&O insurers were paying the
legal costs of Mr and Mrs Compson. Apparently the insurers had not
yet made a decision whether to fund the current litigation. The
misunderstanding may have arisen from the fact that the insurers
were apparently paying the costs of Mrs Compson's appeal
against the decision in the FSC case. The second point raised was
in relation to certain comments in the written Judgment whereby
counsel for the Administrator did not recall saying that the
Claimant itself was considering a claim against the firm of
overseas solicitors. The last point raised was based on a fresh
document, not previously adduced into evidence, namely a letter
from the said solicitors to Mrs Compson, which the Judge accepted
were it admissible did weaken the Compson's third party claim
somewhat but not nearly sufficiently for him to change his view on
whether a good arguable case had been established (with the Court
of Appeal deciding on this point that it could see no error in the
Judge's reasoned conclusion). After considering all the points
made, the Judge held that none altered the substantive result
recorded in his Judgment of 23rd September 2015 and the decision
therefore stood. He also ordered that the claimant pay the
costs of Mr and Mrs Compson and AAML.

These Supreme Court Judgements are highly readable. All
Judgements are available from the Gibraltar Court Service website.
It is often said that litigation is unpredictable. It is certainly
never boring. It has also emerged from these proceedings that the
FSC decision is being appealed by Mrs Compson and Mr Weal to the
Court of Appeal. Finally, I mentioned at the beginning of this
article that there was a dicta in the Judgment of the 4th September
2015 (following the ex parte application) which I consider to be
potentially important in the context of the Gibraltar finance
sector if the Judge is right here. This is found at paragraph 64
and is reproduced in full below:

"64. The case against Mr and Mrs Compson is complicated
by the fact that at the time they are alleged to have been de facto
directors of Advalorem, they were acting as directors of AAML,
which was a de jure director of Advalorem. A question of law arises
as to whether that is sufficient to prevent them being de facto
directors of Advalorem. This is a point argued by Mr Winter QC on
Mrs Compson's behalf in her appeal against the FSC, but I did
not decide the point in that case, because I considered that the
key question was whether Mrs Compson was a fit person to be a
director. It is a difficult question of law. A possible solution
might be to say that, since Mr and Mrs Compson owed fiduciary
duties to AAML which exactly matched the fiduciary duties owed by
AAML to Advalorem, the back-to-back fiduciary duties can be
considered to be concertina'd into a fiduciary duty owed by the
Compsons to Advalorem directly. With some diffidence, I consider
the claimant has shown a good arguable case on breach of fiduciary
duty against Mr and Mrs Compson."

This dicta might affect the operations of companies in Gibraltar
and corporate behaviour in future. This is because hundreds of
Gibraltar companies are managed through corporate entities. That is
to say, instead of individuals being appointed as directors, often
corporate entities discharge that role. When faced with litigation
for breach of fiduciary duties (especially in insolvency), those
that control the corporate director could be expected to argue that
they cannot be held personally liable as the proper party to any
litigation is the corporate director itself (not the individual
directors behind that entity). My own personal view is that the
Judge was right to raise this as a question for determination by a
future Court, if only because those who control entities that
discharge fiduciary duties need to know where the ultimate
responsibility lies. Further, the corporate world is very different
to what it was, say, 20 years ago and today the expectation of
regulators and tax authorities alike is that the actions of
directors must be underpinned by transparency and accountability.
Of course, the only comfort for such directors is D&O Insurance
as it should no longer be assumed that the corporate form will
provide full-proof protection where breach of fiduciary duties can
be established. In this case, D&O insurance was in place and
indeed this was a requirement for the establishment of the EIF
Fund.

Insolvency related litigation is notoriously unpleasant and
combative. In this latest court saga the Administrator brought
proceedings against a background involving allegations of
impropriety. This included proceedings against Mrs Compson and Mr
Weal (the claimants in the original FSC court case). What litigants
have to be careful when advancing a claim for alleged fraud is that
not all defendants might be viewed in the same way by the courts
even where a fraud has been committed and a judge has to unravel
the facts. Here the claim against Mr Weal was dismissed in the
ex-parte application. The Compsons themselves obtained a
hard-fought 'round 2' court victory in a decision which, as
far as they were concerned, was probably not surprising on the
facts given the Judge's findings. There are those within the
Gibraltar financial sector who believe that the pendulum swung too
far in the FSC case arising from certain dicta (i.e. that if the
Judge's observation that the Court should be reluctant to
interfere with regulatory sanctions is followed in the future, few,
if any, cases will ever be successfully appealed). Whether or
not this is so still has to be decided by the Court of Appeal
following Mrs Compson's appeal against the FSC decision.
Clarification and further judicial guidance would certainly be
welcome by directors of Gibraltar companies, especially as the
corporate environment in Gibraltar is likely to become more
litigious if there is an increase in the number of liquidations in
the future.

The final episode in the saga took place in the Court of Appeal,
with the Judgment dated 10 December 2015. The Administrator
appealed the decision of Mr Justice Jack in his Judgments dated 23
September 2015 and 24 September 2015 respectively.

In a very lengthy Judgment which reviewed all the evidence and
decision of the lower Court, the Court of Appeal found that the
Supreme Court Judge had erred on certain aspects of his decision
but not on others. The Judgment was delivered by Potter, JA, with
whom the other Court of Appeal Judges agreed.

The Court of Appeal held, inter alias "[...] when
considering the question of "good arguable case", in my
view the Judge was wrong in the decision he reached based on the
various considerations I have enumerated."

However, the Court of Appeal further held that this is not the
end of the matter for the purposes of the injunctive relief sought
and that Mr Justice Jack had to give separate consideration to the
Risk of Dissipation, which he did. Here the Court of Appeal held
that the Judge followed the correct approach in cases of this kind.
The appeal was therefore dismissed.

It is not reported in these Judgments what cost liability the
Administrator faces. However, Mr Justice Jack awarded costs to the
Compsons when he discharged the freezing order, whilst the matter
of costs in the Court of Appeal is to be heard at the next session
of that Court, and there being also a pending application by the
Compsons for damages pursuant to the undertaking.

I think what these cases highlight is that questions of
knowledge and intent (especially when made against a background of
allegations of impropriety) are fact-specific and will depend very
much on a judge's view of the evidence before him.

Finally, by way of general comment:

First, the predicament that Mr and Mrs Compson find themselves
in is most unfortunate, with their personal financial affairs now
very precarious, as evidenced in the Court's assessment of the
risk of dissipation of assets. The FSC investigations and decisions
concerning their fitness and propriety, the allegations of fraud
and related litigation, have impacted significantly on their
ability to seek employment in the financial sector in the future,
and in the case of Mr Compson the Court of Appeal observed
"he is currently unable to work through ill-health. He has
retired and it is not clear when, if at all, he will be able to
resume work, even if he wished to do so." It is important
for all Gibraltar EIF Directors to be aware of this potential
occupational hazard.

Second, whilst these Court cases continue to provide little
comfort to EIF Directors, in my view they equally send a message to
liquidators that judges will consider the evidence carefully and
that different inferences can be drawn depending on the evidence,
such that matters tend never to be clear cut when litigating. In
this case the Administrator lost the appeal to the Court of Appeal,
notwithstanding certain findings in his favour. In my view these
proceedings therefore strengthen the argument for the future that
insolvency related litigation, generally, should try to be settled
out of Court given the uncertain nature of litigation.

Third, if any lessons come out of this for EIF Directors,
arguably, it must be that they should not delegate dealing with due
diligence by a professional services provider to a third party
where he has no formal appointment or role with the company, and
also that professional valuations based on "fantasy
assumptions" will be looked at unfavourably by the
Courts. It is of note, however, that in his Judgment in the
regulatory appeal, Mr Justice Jack asked for the matter to be
reported to the relevant valuers' professional body the Royal
Institution of Chartered Surveyors for investigation (paragraph 16,
78 et seq and particularly 84, Compson v FSC & Weal v
FSC).

Fourth, directors that do not have adequate D&O cover, the
financial means or professional support to defend any future
allegations/claims against them, take on the responsibilities and
duties of Directors at their peril. In this case, as already
stated, there was such D&O cover. A wider question for
discussion might be, given the spate of litigation, should
directors generally enjoy protection beyond standard D&O
insurance cover; for example, statutes that limit the liability of
directors, in certain circumstances, by agreement in the bylaws
(articles). Of course, this would be a matter for the
legislature.

Fifth, in countries around the world liquidators sometimes face
criticism about the costs of insolvent liquidations, which costs
are paid out of the estate. Unsuccessful litigation can
significantly drive up the costs of any liquidation.

Sixth, these new cases come against a background of growing
debate within the local financial sector about the role of the EIF
regime and of regulation more generally.

Separately, on the 7 September 2015 the FSC published a Policy
Statement and accompanying paper setting out its approach to the
thematic review of EIF Directors. The Statement sets out the
FSC's expectations of the approach Directors of EIFs should
take to their role and responsibilities as Directors. The Paper
also explains what directors can expect from the thematic review
and the broader outcomes the FSC aims to have achieved at the
conclusion of the review. In her speech at GACO's Risk
Awareness Week (held on the 7 September 2015), the FSC's CEO,
talked about the risks that poor standards can pose to consumers,
the financial services sector and to the jurisdiction if EIF
Directors do not carry out their duties properly. The CEO also
explained how the FSC's work will focus on making sure that all
directors conduct the role effectively and competently, supporting
a well-controlled environment for EIFs activities. She also noted
referring to the Compson case: "It is clear that this
action, upheld when appealed to the Gibraltar Supreme Court, has
had an impact in Gibraltar. In particular, I have welcomed the
subsequent focus on the need for directors of licensees to consider
carefully whether they are properly discharging their duties. This
is important, not just to give confidence that there is a credible
deterrent against wrong doing in Gibraltar, but also to enhance the
reputation of Gibraltar as a safe jurisdiction for investors and
reputable players to do business."

My own view is that nothing which the FSC has said could have
come as a surprise. The industry is currently working
collaboratively with the regulator for the mutual benefit of all
Gibraltar stakeholders. Because of its relative size and high
involvement of local professional firms, however, the Gibraltar
financial sector is extremely sensitive to regulatory changes as
these can have a disproportionate impact on the overall economy. It
is therefore always important to maintain a proper balance between
good regulation and over-regulation, especially in order not to
stifle innovation and growth.

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